Tuesday, April 26, 2011

Oklahoma Unfunded Pensions Problem

States are $1.26 trillion in the hole when it comes to their pension and retiree health obligations, according to a report released Tuesday.
And taxpayers are ultimately on the hook for this shortfall, which soared 26% in one year.
The Great Recession has wreaked havoc on states' pension and retiree health systems, the Pew Center on the States found. The report covers fiscal year 2009, which began July 1, 2008 in most states.
States are largely responsible for this predicament. As tax revenues plummeted, many skipped part or all of their annual retiree benefits contributions as they struggled to pay for education, Medicaid and other services.
"Far too many states have not responsibly managed the cost of retirement benefits, effectively running up the price for taxpayers," said Susan Urahn, the Pew Center's managing director.
Oklahoma is number three according to the article.

Moody’s Investors Service recently made a major change in how it will calculate a state’s credit rating. Oklahoma policymakers should take notice. Moody’s will now include a state’s unfunded pension liability, along with the traditional net tax-supported debt, when determining a state’s credit rating. This change is particularly significant for Oklahoma.
Moody’s methodological change now brings Oklahoma’s unfunded pension liability into the picture.
Oklahoma’s unfunded pension liability as a percent of GDP in 2009 was 8.6 percent. This was more than three times higher than in neighboring states (2.6 percent), and more than twice as high as the national average (3.3 percent).
Using estimates pioneered by Joshua Rauh (Northwestern University) and Robert Novy-Marx (University of Chicago), Oklahoma’s unfunded pension liability could be as high as 14.5 percent of GDP. This is more than three times higher than in neighboring states (4.7 percent), and more than twice as high as the national average (5.7 percent).
The Oklahoma state Senate passed House Bill 2132, characterized as a significant step toward pension reform at a time that analysts of all stripes agree taxpayers face approximately $16 billion in unfunded liabilities across the state’s systems. That gap is more than twice the size of the entire state budget. A decade ago, the funding gap was about $6 billion.
H.B. 2132, sponsored in the Senate by President Pro Tem Brian Bingman of Salpulpa and Sen. Mike Mazzei of Tulsa, gained approval on a vote of 33-13 in the upper chamber.
HB 2132, as introduced, makes several modifications to the Oklahoma Pension Legislation Actuarial Analysis Act. The measure changes the definition of a "nonfiscal retirement bill" by removing the provision that allows a cost-of-living increase to be considered nonfiscal. The bill also stipulates that any retirement bill having a fiscal impact is subject to the statutory requirements related to concurrent funding.
The measure also includes language such that a retirement bill with a fiscal impact will only be considered currently funded if the Legislature provides funding in an amount no less than the annual normal cost to the retirement system. Further, a retirement system may not adopt a cost-of-living actuarial assumption or include an assumption of this nature in any actuarial valuation. Should the State Board of Equalization, charged with determining whether the requirements of concurrent funding have been met, conclude that a retirement bill with a fiscal impact is without concurrent funding the bill will not become effective and may not be administered by the applicable retirement system until funding has been provided.
HB 2123 as introduced, amends the Oklahoma Pension Legislation Actuarial Analysis Act (OPLAAA), so that Cost of Living Adjustments (COLAs) are considered fiscal retirement bills for purposes of OPLAAA procedure, thus requiring COLAs be concurrently funded by the Legislature at the time of enactment.  The practical application of the concurrent funding requirement, as well as, the specific mandate in the measure, requires each pension system to remove COLA assumptions from their actuarial evaluation. According to Legislative Actuary calculations, removal of COLA assumptions will impact the Unfunded Actuarially Accrued Liabilities (UAAL) and the Funded Ratios of the pension systems as follows: 

OTRS - UAAL will decrease by approximately $2.9 billion and increase OTRS’s funded ratio from 48% to 56%;
OPERS - UAAL will decrease by approximately $1.4 billion and increase the OPERS funded ratio from 66% to 77%;
URSJJ - UAAL will decrease by approximately $43.4 million and increase the URSJJ funded ratio from 81% to 96%;
FPRS - UAAL will decrease by approximately $472.4 million and increase the FPRS funded ratio from 53% to 63%;
PPRS - UAAL will decrease by approximately$414.3 million and increase the PPRS funded ratio from 75% to 91%
OLERS - according to officials at OLERS their Funded Ratio increase would be minimal because OLERS has a statutory provision that adjusts retiree benefits, in the place of ad hoc COLAs, based on increases in active employee pay.
State Sen. Mike Mazzei is the author of Senate Bill 891 and chairman of the Senate Select Committee on Pensions.  He said the biggest part of that $16 billion in unfunded liability is in the Oklahoma Teachers Retirement System (OTRS), with $10 billion in unfunded liability. 
“Under Senate Bill 891, cost of living increases (COLAs) must be funded by the legislature, instead of leaving them to be absorbed by the retirement system,” said Mazzei, R-Tulsa.  “This legislation makes that crucial reform for all our pension systems.  This fiscal responsibility measure should reduce our unfunded liability more than $5 billion.”
SB 891 in its current form requires public school districts that employ retired members of the Teachers’ Retirement System of Oklahoma (OTRS), to pay an amount equal to employee contributions for active members on behalf of the retired members employed.  Based on current post retirement hires, OTRS estimates SB 891 would result in increased revenue of approximately $5,000,000.  An annual cost of approximately $5,000,000 will result for education employers

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